How Personal Guarantees Put Your Business and Assets at Risk
Many small business owners believe that forming an LLC or corporation shields their personal assets. While that protection generally holds, a single clause in a contract can dismantle it—the personal guarantee.
This overlooked clause creates a major exposure point. Whether you’re leasing space, applying for a loan, or prepaying another company, you may unknowingly risk your house, savings, or future income.
What Is a Personal Guarantee?
A personal guarantee is a clause where you, as the business owner, agree to be personally liable if your company fails to fulfill its obligations. The LLC structure normally separates your personal assets from business debts, but this clause makes you personally accountable.
Common situations include:
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Commercial leases: Landlords often require a personal guarantee, especially from small businesses, as they don’t trust that a young LLC will stick around long-term.
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Business loans: Banks will almost always ask for one to secure repayment.
These scenarios turn your personal wealth into a backup plan for your business’s obligations.
The Other Side of the Coin
While you might be wary of signing personal guarantees yourself, the same logic applies in reverse. If your business is the one sending money in advance—say for products or services—you might want the other party to sign one. Here’s why.
If a small business you paid goes under, your legal options may be worthless. Even if you sue and win, collecting is another story. Most small companies don’t hold much in the way of assets. Revenue is quickly distributed to staff or owners. So you may end up with nothing but a court judgment and no way to collect.
When to Ask for One
You may want to consider requiring a personal guarantee if:
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You’re prepaying a significant amount for a service or product
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The other business is new or has no track record
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You’re offering a loan or extending credit
Even better, structure your deals in smaller payments based on clear milestones. That way, if the relationship sours, your exposure is limited.
The Practical Cost of Enforcement
Even if the law is on your side, suing takes time and money. Litigation might take a year or more, and legal fees can stack up fast. Plus, even if you win, there’s no promise you’ll recover anything if the other party lacks assets.
Before you commit to any big payment or contract, ask yourself:
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What happens if they don’t deliver?
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Can I afford to chase this in court?
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Will there be anything to collect if I win?
Practical Ways to Protect Yourself
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Avoid signing personal guarantees whenever possible
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Ask for one from others in high-risk deals
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Stage payments to reduce risk
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Hold back leverage—whether that’s final payment, delivery, or approval—until obligations are met
These tactics don’t require any legal trickery. They’re practical habits that help small businesses stay safer when dealing with uncertain partners.
Video Transcript
The Personal Guarantee That Changes Everything
Most business owners think that forming an LLC protects their personal assets, and most of the time it does, but there’s one small clause that can blow that protection wide open, the personal guarantee. In this video, we’re going to unpack one of the most overlooked risks in business contracts. How you can accidentally put your house, your savings, and your future on the line.
How to Stay in Control of Business Deals
And how to protect yourself when others ask you to take that risk, whether you’re signing a lease, taking out a loan, or paying another business upfront. You need to understand when to say no, when to negotiate, and how to structure deals that keep you in control. So just like not having a force majeure clause is a problem in many contracts.
Liability Basics of an LLC
Another problem is a personal guarantee. Now, you know the general rule, which is business owners are not contractually liable or not personally liable for the contracts of their business. So if you have an LLC and it has a contract with another business. Your LLC is liable to perform under that contract, but you’re not personally liable.
How the Exception Works
In other words, if the LLC breaches the contract, the other side can’t sue you personally and go after your house and your car, the other side can only go after your LLC. But there’s a big exception to that. That is the personal guarantee. A personal guarantee is a contract provision where you say, Hey, I’m willing to be personally liable for.
Common Examples
My business if it breaks this agreement. Couple common examples are a lease with a landlord. If you rent office space or space for your business, usually the landlord will say, Hey, you’re a small business. I’m not gonna trust that you’re LLC or corporation will be around. So you need to sign a personal guarantee.
Similarly. A bank will usually require you to sign a personal guarantee if you go to get a loan. So this bank says, yeah, we’ll give your business a loan. It can have all that money, but if it doesn’t repay it, the bank can go after you personally. So a personal guarantee is a very big exception to the general rule, which says you’re not liable for your business.
Landlords and Banks Often Require Guarantees
So think very carefully before signing a personal guarantee. I usually do everything I can to help my clients avoid having personal guarantees, but sometimes it’s inevitable. In particular with landlords and with banks.
When Others Don’t Guarantee to You
You might be thinking to yourself, that raises an interesting point. If a landlord or bank sues my LLC, my LLC might not have much in it. Well, if they have a personal guarantee, they can go after me. But what about all those companies that don’t have personal guarantees with me? That means they can sue the business and unless your business has equipment or some other significant assets, it might not have a whole lot.
The Risk of Paying in Advance
And then you might say to yourself, well wait a second, if that contract could be meaningless to these other businesses. Maybe I need to worry about what if they breach their agreement and they don’t have any assets? And you’re exactly right. If you enter into a contract with a small business, and let’s say you pay them a lot of money in advance and then they go out of business, what happens if you try to sue them? Usually?
Nothing happens. You might win, but what do you win? You get a piece of paper from a court that says this LLC or corporation owes you money and they don’t have any money and they’re not in business. So at the end of the day, you win nothing.
Asking for Personal Guarantees From Others
So that’s why it’s really important for you to consider should you have a personal guarantee from other parties if they want to borrow money from you.
If you are going to pay money in advance of getting products or services from them, maybe you want to consider a personal guarantee or you might want to consider making payments gradually in phases or milestones so that all of your money is not at risk right away. Because even though technically people can breach agreements.
The Real Cost of Legal Action
What does that matter? Unless they’re enforced? And how do you enforce them? You have to go sue them. And that means paying money for legal fees, and often it means waiting a year for a lawsuit. So from a practical standpoint, it’s not just enough to prove that somebody else breached an agreement. You often want to think about the practical side of how much would this actually cost.
To go after these guys to sue them. How much time would it take? And if we win, assuming we will, how much are we really out and can we really collect against them?
Ask the Right Questions Before You Sign
Many, many times clients come to me with a contract and we’re talking about it, and I tell them, look, let’s assume for a moment that they breach the agreement.
And let’s assume they don’t have any assets, because we know most companies don’t. As soon as the money comes in, it gets paid out to the employees or the owner as a profit distribution. Many companies don’t have value. What are we gonna do then? And so many times companies will say, ah, I guess I don’t want to pay in advance.
I’ll pay at the time I get the product, or maybe I’ll do 10% down. I’m willing to commit some level of risk, but I need some more assurances before I pay out a large amount of money.
Personal Guarantees Go Both Ways
What’s the takeaway here? First off. Think about whether you should sign a personal guarantee. Usually you don’t want to. Second, think about anytime you do a deal with somebody, should they sign a personal guarantee?
So it’s not just their company that’s liable, it’s them personally, and you can go after their personal assets. And also think about, in light of the fact that it is so expensive, time consuming and difficult to commence a lawsuit and actually recover the money owed, think about, are there any practical ways that you can avoid that scenario?
Keeping Leverage Until It’s Time
By somehow keeping some leverage, holding something back until you’re ready to make that exact transition.
Learn More for Free
Now, if you’d like to know more about how to avoid trouble like this, I have a free resource at AaronHall.com/free. I provide information for business owners of small to midsize companies on how to avoid common legal problems.
That includes a PDF. It includes videos talking about important issues. I’m Aaron Hall. I’m an attorney for business owners and entrepreneurial companies.